Retreating U.S. dollar set to give reprieve to Chinese yuan: Reuters poll

BENGALURU (Reuters) - The Chinese yuan is expected to slip only slightly over the coming year, a Reuters poll of currency strategists showed, as markets move to price in more U.S. Federal Reserve interest rate hikes than the three currently expected.

FILE PHOTO: U.S. Dollar and China Yuan notes are seen in this picture illustration June 2, 2017. REUTERS/Thomas White/Illustration/File Photo

An upbeat assessment of the U.S. economy from the Federal Reserve’s new chairman Jerome Powell last month and the administration’s tax cuts have raised analyst expectations the central bank may deliver four hike rates rather than three this year.

However, recent bearish sentiment toward the dollar has left forecasts for the yuan less pessimistic than they were a month ago, with markets currently cautious about pricing in that fourth Fed hike in 2018.

U.S. President Donald Trump’s decision last week to impose hefty tariffs on imports of steel and aluminium sparked concerns of a full scale trade war and has made the dollar outlook murkier. [EUR/POLL]

Still, the yuan CNY=CFXS, which is up more than 2 percent this year so far, is predicted to weaken to 6.40 per dollar in six months and trade at that level in a year, according to the poll of nearly 60 foreign exchange strategists taken March 1-6.

That compared to 6.44 per dollar in the previous poll.

“The U.S. dollar may regain some ground on the back of higher U.S. yields, but we see the trend depreciation of the U.S. dollar extending this year,” said Irene Cheung, senior strategist for Asia at ANZ.

China’s yuan edged up against the dollar on Tuesday, supported by a slightly firmer official mid-point, and after senior Republicans advised Trump against imposing tariffs to avoid a probable global trade war.

“Although the details haven’t been announced by President Trump, imposing a tariff will be a big problematic event,” said Li Yishuang, FX analyst at China Securities in Beijing.

“If such measures would be adopted, the dollar’s status as the dominant reserve currency will be weakened and will cloud the long-term outlook for the dollar.”

Premier Li Keqiang on Monday said trade disputes need to be settled through negotiation and that China will keep its yuan currency stable this year.

Li also said that China will keep its monetary policy “prudent” and “neutral”, neither too loose nor too tight, and will maintain reasonably steady liquidity.

But the PBOC will need to respond to an expected rate hike from the Fed later this month, as Zhou Xiaochuan, the long-serving People’s Bank of China (PBOC) governor, is widely expected to be replaced during the annual meeting of parliament that started in Beijing on Monday.

“Authorities are likely to maintain their ‘stable yuan policy’ which will still give them room for yuan appreciation, particularly when there’s pressure for the dollar to depreciate,” said Janu Chan, senior economist at St. George Bank.

The Indian rupee INR=, which has weakened nearly 2 percent in 2018 so far, is now expected to regain about half of those losses over the coming year, again mostly driven by dollar weakness.

The latest consensus was for the rupee to trade at 64.50 per dollar in a year, from 65.04 on Tuesday.